FASB/IASB/SEC Update. American Accounting Association. Tom Linsmeier FASB Member August 4, 2014

Transcription

1 American Accounting Association FASB/IASB/SEC Update Tom Linsmeier FASB Member August 4, 2014 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations.

2 Revenue Recognition: Joint Project 2

3 Improvements Provides a robust framework for addressing revenue recognition issues Improves comparability of revenue recognition practices across entities, industries, jurisdictions, & capital markets Simplifies the preparation of financial statements by reducing the amount of guidance to which entities must refer Enhances disclosures to help users of financial statements better understand the nature, amount, timing, & uncertainty of revenue 3

4 Scope All contracts with customers, except Lease contracts Insurance contracts Financial instruments Guarantees Non-monetary exchanges between entities in the same line of business to facilitate sales to customers Sales/Transfers of nonfinancial assets outside of the entity s ordinary activities (Subtopic ) Recognition and measurement guidance 4

5 Five steps to apply standard Recognize revenue to depict the transfer of goods or services in an amount that reflects the consideration to which the entity expects to be entitled 1 Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the entity satisfies a performance obligation 5

6 Implementation guidance Performance obligations satisfied over time Methods for measuring progress Sale with a right of return Warranties Principal versus agent considerations Customer options for additional goods or services Nonrefundable upfront fees Licensing Repurchase agreements Consignment arrangements Bill-and-hold arrangements Customer acceptance Disclosure of disaggregated revenue Customers unexercised rights 6

7 Cumulative catch-up Cumulative catch-up Transition, effective date and early application 7 PY2 (2015) PY1 (2016) CY (2017) CY footnotes Retrospective (with optional practical expedients) Contracts under new standard Contracts restated Cumulative effect at date of application Contracts not restated Existing* and new contracts under new standard Existing and new contracts presented under legacy IFRS/US GAAP *contracts not completed in prior years as determined under legacy revenue guidance Effective date, annual reporting periods beginning: - IFRS on or after 1 January 2017, early application permitted - US GAAP after 15 December 2016, one year deferral for nonpublic entities, early application not permitted 7

8 Transition Resource Group Responsible for informing FASB & IASB about potential issues that could arise when implementing the new standard Will solicit, analyze, & discuss stakeholder issues that apply to common transactions that could reasonably create diversity in practice Will provide information that will help the Boards determine what, if any, action will be needed to resolve that diversity Will not issue guidance 8

9 Leases: Joint Project 9

10 Why a Leases Project? Lessee - Most lease assets and liabilities are off-balance sheet - Limited information about operating leases Lessor - Lack of transparency about residual values - Consistency with lessee proposal and revenue recognition proposal $1.25 trillion of off-balance sheet operating lease commitments for SEC registrants * * Estimate according to the 2005 SEC report on off-balance sheet activities 10

11 Proposed Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 11

12 Lessee Model Approaches All leases (more than 12 months) are recognized on the lessee s balance sheet Current U.S. GAAP (IFRS) Capital (Finance) Leases IASB Type A FASB Type A Operating Leases Type A Type B All leases are the same. Not all leases are the same. Classification is based on existing U.S. GAAP/IFRS. 12

13 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Lease asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Type B Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments 13

14 Short-Term Leases Exemption Recognition and Measurement Exemption for Lessees For leases with a term of 12 months or less No longer based on maximum possible term, now aligned with definition of lease term 14

15 Lessor Model Approaches IASB A lessor should determine lease classification (Type A vs. Type B) based on the concept underlying existing U.S. GAAP and IFRS lessor accounting Same lease classification test (Type A vs. Type B) as IASB FASB A lessor will not recognize upfront profit for Type A leases that do not transfer control of the underlying asset to the lessee This aligns with what constitutes a sale in the recently issued revenue recognition guidance 15

16 Lessor Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Net investment in the lease Interest income and any profit on the lease Cash received for lease payments Type B Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments 16

17 Financial Instruments: Impairment (FASB & IASB) 17

18 Impairment: Project Objectives Address concerns about delayed recognition of losses under incurred loss approach Reduce complexity by having a single impairment model 18

19 The FASB model simply stated 19 Single measurement objective expected credit loss model reflecting more forward-looking information Basic estimation objective is consistent from period to period no need to define a transfer notion that prescribes that a different measurement objective for different assets in a period At each reporting date, an organization recognizes a credit impairment allowance for its current estimate of the expected credit losses on financial assets held at the reporting date Includes changes in the estimate of expected credit losses resulting from, but not limited to Changes in credit risk of assets held by entity Changes in conditions since previous reporting date Changes in reasonable & supportable forecasts about the future Provides enhanced disclosures compared to current GAAP 19

20 Model applies to 20 Debt instruments (e.g., loans and securities) measured at: Amortized cost FV-OCI Loan commitments Lease receivables Trade receivables Reinsurance receivables 20

21 Similarities in the FASB & IASB Models No initial recognition threshold Expected credit loss models, reflect more forward-looking information Assets that have experienced an increase in credit risk since initial recognition (i.e. performing and underperforming assets) recognize lifetime expected credit losses 21

22 Key Difference Between FASB & IASB Models For assets that have not experienced a significant increase in credit risk (i.e., performing assets) FASB s allowance = the entity s estimate of credit losses expected over the lifetime of those assets IASB s allowance = the entity s lifetime estimate of credit losses on expected defaults over the next 12 months 22

23 High Level Feedback U.S. Stakeholders Strong (3-1 margin) user support for FASB proposal Preparers generally do not support recognition of full life time losses on day 1 - Concern with projecting losses beyond a reasonably foreseeable time period - Concern that CECL does not reflect economics of lending A final Update is expected at the end of

24 Financial Instruments: Classification & Measurement (FASB) 24

25 Hold to collect Hold to collect & sell Other business models Overall Debt Investment Model FASB Exposure Draft (substantially converged) Step 1 Are cash flows Solely Principal and Interest? Yes Form of instrument not considered (e.g. loan vs. securities) No Step 2 Hold to collect cash flows ONLY? No Hold to collect cash flows AND sell assets Yes Yes No Amortized Cost* FV-OCI FV-NI Trade receivables Loans held for investment Some debt securities Senior securitization tranches Most Liabilities *No tainting Debt securities Potentially some loans Equity securities Certain debt securities Loans held for sale Convertible debt investments Residual securitization interest Certain hybrid assets Derivatives 25

26 Debt Investment Model - Redeliberations The Board decided not to continue to pursue the SPPI model to assess the contractual cash flows of financial assets. The Board also decided to retain current bifurcation requirements and not apply any other new cash flow model. (Current U.S. GAAP) Similarly, the Board decided not to continue to pursue the business model assessment from the proposed Update. The Board decided to retain the separate models for classifying loans and securities that exist in current U.S. GAAP. 26

27 Equity Investments The Board decided that equity investments must be classified as FV-NI (other than those accounted for under equity method or the practicability exception noted below) Fair value through net income Default Practicability election Irrevocable election for investments without readily determinable fair values (practicability exception*) *Measures private equity investments based on any observable price changes in orderly transactions for the identical/similar investment of the same issuer 27

28 Financial Liabilities FASB Exposure Draft (Feb 2013) FASB s proposed model: Amortized cost Required unless Fair value through net income Short sales, Nonrecourse, intend to subsequently transact at FV, and FVO option for hybrid liability Retains bifurcation of hybrid instruments If elect fair value option for hybrid liability, changes due to own credit go to OCI For non-recourse debt that can only be settled with certain assets, measurement of debt follows measurement of assets (FASB only) 28

29 Disclosure Framework Project: FASB 29

30 Disclosure Framework Project Objective: Improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements. Are financial statements a vehicle for communications with investors? Or are they more of a compliance exercise? 30

31 Phase I: Board s Decision Process Issued March 4, 2014; Comment period ended July 14, 2014: The Exposure Draft, Conceptual Framework for Financial Reporting: Chapter 8: Notes to Financial Statements Issues Addressed in the Board s Decision Process: Purpose of the notes General limitations - Relevance - Costs - Certain information oriented toward the future Information that could be appropriate for inclusion in notes Considerations for interim reporting 31

32 Phase II: Entity s Decision Process Field Study: Designed to test the ability of entities to exercise discretion over which disclosures they provide in the notes Participant Profiles: Assigned Materiality or Entity-Specific Relevance Outreach Efforts: Included calls and site visits with participants, participants auditors, national office representatives, the PCAOB, and a securities attorney 32

33 Field Study Results More guidance around discretion facilitates more qualitative considerations The word materiality has a strong quantitative connotation in practice Preparers thought notes were generally more effective after applying their assigned discretion criterion Obstacles in the financial reporting system discourage the application of discretion 33

34 Disclosure Framework Next Steps Analyze comment letters regarding the Board s Decision Process Utilize field study results and other feedback to develop changes to the Codification that promote the use of discretion - Expose changes to several Topics disclosure sections Address disclosures for interim periods Address accounting policies 34

35 Private Company Issues: FASB 35

36 Private Company Council (PCC) Process PCC Agenda Decision FASB final endorsement FASB issues final guidance PCC deliberation of staff analysis and vote* PCC re-deliberates and votes* FASB endorsement Exposure Draft *FASB participates in deliberations 36

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38 PCDMF Fundamentals Assist in user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework Intended to facilitate decisions & drive consistency Fundamental approach retains or improves information relevant to typical users Reduce cost & complexity, but not adversely affecting reporting of relevant information 38

39 Organizations Affected Scope of PCDMF Public business entities, not-for-profits & employee benefit plans excluded from the scope FASB will determine if guidance should apply to organizations outside of the scope - And if so, whether the alternative should be required or an option 39

40 PCC Project Progress Issue Goodwill Interest Rate Swaps Common Control Leasing Development Stage Entities Identifiable Intangible Assets Status Final Alternative Final Alternative Final Alternative FASB ASU In Progress Stock-Based Compensation Definition of a Public Business Entity (Phase 2) PCC Research Agenda PCC Agenda ***PCC also advising the FASB on key agenda projects*** 40

41 Questions? 41